Inflation may be rampant, but not all consumer products are getting more expensive. Instead, they’re getting smaller.
It’s not an optical illusion, and manufacturers haven’t invented a “new and improved” product, or created more efficient packaging. Three marketing professors from the Olin Business School at Washington University in St. Louis comment on why smaller packaging is a good idea — for business.
First, consider the reason why a company has to make such a decision in the first place, says Chakravarthi Narasimhan, the Philip L. Siteman Professor of Marketing.
“Two macro economic events seem to offer a perfect recipe for this to happen. Costs are going up due to inflation, thanks to higher energy and commodity prices, which is what we’re seeing now,” he says. “Consumers are hurting and not feeling great about the economy so passing along a cost increase might drive the consumers away to cheaper brands or to abandoning the category all together.”
The solution, Narasimhan says, is to hold steady on the price but offer smaller quantities.
Michael Lewis, assistant professor of marketing, explains: “The primary issue with this practice is what people refer to as a reference price effect. Essentially, I’m used to paying $3.99, so when I see $4.19 a big red flag goes up. This is just the reverse of why we see big spikes in demand when firms temporarily cut prices. So, rather than change a price upward, firms take down the size. Sometimes they even leave the box the same but put less in it. We have seen the size reduction and weight reduction in pasta sauce and cereal over the past few years.”
Assistant marketing professor Amar Cheema adds, “The decrease in package size is less noticeable than the change in price because people pay more attention to price. Of course, the change is reflected in price per unit, but not everyone looks at that.”
Why, then, don’t consumers see through this ruse?
“I think it is part psychological and part a forced reduction in consumption,” Narasimhan says. “If the firm offered the same package at a higher price, in the consumer’s mind the cost has gone up. If you reduce the package size and keep the price, the cost stays the same, but I consume less. So, even though on a per-ounce basis, the cost has gone up, a consumer may see greater flexibility in adjusting his consumption than departing with more money.”
Another thing that companies should consider is the risk of losing customers — and not getting them back — as a result of raising prices. Narasimhan says that is what happened to Miller Brewing several years ago.
“During the late seventies when Carter was president and inflation was close to 15 percent, Miller took a price increase while Anheuser-Busch did not,” Narasimhan says.
“I’ve read articles by some analysts that point to that being the period when Miller lost its dominance among blue collar workers who were the core buyers of the product Remember those ‘It’s Miller time’ commercials? Usually, when these kinds of hidden price increases are taken, you need the cooperation of retailers to close out the inventory of the old package before putting in the new package with a new price.”
All three professors are available for interviews. WUSTL offers free VYVX or ISDN lines for live or taped broadcast interviews.
Professor Cheema can be reached via e-mail at cheema@wustl.edu or by phone: (314) 935-6090.
Professor Lewis can be reached at michael.lewis@wustl.edu, or (314) 9354534.
Professor Narasimhan can be reached at narasimhan@wustl.edu, or (314) 935-6313.
For further assistance, call Shula Neuman at (314) 935-5202.